Tax implications of a Settlement Agreement

househunt

Hello everyone.  My partner has been through hell with her employer and after a lengthy battle, she has been made an offer to settle for £70k.  This is compensation for termination of job & discrimination.  She's sick of everything and just wants to move on with her life and is thinking of settling to pay off any debts she owes.

So my question is, how do we work out how much tax would be deducted from this?  Is there a calculator or a table/chart?

Thanks

General_Grant

So it is being paid because of her employment and is not in respect of a redundancy situation.

Basically, you could add the £70K to whatever else she will be earning and see what that would mean she is paid for the whole tax year.  Then you can see what tax would be due.

As you mention paying off any debts, presumably you don't have to consider other income from savings.

househunt

Thanks @General_Grant - My apologies as I've edited my post since you replied.  No it's not redundancy - It's for discrimination and unfair dismissal/termination of employment.

She doesn't currently work, hence no income or savings, so how can I break it down and calculate it?  I appreciate it might not be 100% correct, but I just want an approx. figure to give us an idea.

Marcon

General_Grant said:

So it is being paid because of her employment and is not in respect of a redundancy situation.

Basically, you could add the £70K to whatever else she will be earning and see what that would mean she is paid for the whole tax year.  Then you can see what tax would be due.

As you mention paying off any debts, presumably you don't have to consider other income from savings.

Not quite that simple - at least some part should be tax free.

Normally any settlement offer should include payment (typically around £500) for the employee to take independent legal advice on the agreement before signing. Has that happened? Signing without advice is rarely a good idea, especially with feelings running high.

Even if it has, this makes helpful reading: https://www.ms-solicitors.co.uk/employee/settlement-agreements/factsheet-settlement-agreement-tax-implications/

househunt

Thanks very much Macron - I'm not sure if the settlement includes payment towards legal advice.  I really appreciate that we can't work out an exact figure, but is there no way of getting a rough idea?  For example my understanding is that the first £30k is ignored and anything on top of that is tax at certain bands - This is what I'm not sure about.

DoctorStrange

The £30k figure relates to redundancy, which you've confirmed doesn't apply here, but you do say it's for termination of employment.

Are you 100% sure they're not treating it as redundancy, even a bad/unfair redundancy?

If definitely not a redundancy situation, what have they said the money is for? Unpaid bonuses,  holidays,  notice period maybe?

I'm not sure they'd just offer "compensation" and settlement agreement without redundancy tbh.

Also, how much has she earned this tax year already?

househunt

Thanks for your input DoctorStrange.

It's definitely not redundancy.  I believe they are Ex-gratia and Injury to Feelings payments.

She has not earned any income this year as she has been on benefits

DoctorStrange

OK, so seems ex-gratia and redundancy rules are the same so,  assuming that's correct, then the first 30k is usually tax free. 

Assuming the benefits she's received are tax-free, then the tax on the 40k element of the payment would be roughly £9,100 so she'd get £60.9k.

If the benefits are taxable though, that changes things. Say she got £10k in taxable benefits that'd mean she'd have to pay roughly £12.3k, so £57.7k net.

These are very rough figures just for illustration, and you can Google tax calculators to play around.

As mentioned above though, they should hopefully be including independent legal advice in the settlement and it's wise to explain everything to your advisor and check every detail. 

househunt

Thanks so much DoctorStrange.  That's so helpful and clearly explained.  I appreciate that it's just a rough amount, but it gives us an inkling of what to expect.  Yes, I hope to explain to my wife that she needs independent financial advice. 

No she doesn't have any taxable state benefits. 

Couple of questions though. 

I know, you gave me the numbers, but how did you exactly calculate these and what tax bands did you apply?  

I can't find any settlement calculators, so if you know of any links then that would be really appreciated.

Thanks again 

Undervalued

General_Grant said:

So it is being paid because of her employment and is not in respect of a redundancy situation.

Basically, you could add the £70K to whatever else she will be earning and see what that would mean she is paid for the whole tax year.  Then you can see what tax would be due.

As you mention paying off any debts, presumably you don't have to consider other income from savings.

No, providing it is compensation for her loss of employment and not a contractual entitlement the first £30K will be tax free. It doesn't have to be redundancy.

Notice pay and any untaken holiday pay will be taxed in the normal way.

househunt

Thanks @Undervalued - Yes, there's no notice pay or untaken holiday pay. 

Assuming this is the case and ignoring the first £30k, I would be most grateful if you (or anyone else) could kindly explain to me how @DoctorStrange calculated the remainder £40k payment's tax to be approx. £9100?

How did he break down the tax bands within the £40k?  Also is there a calculator that can do this estimate for me?